General Equilibrium Model Of Economy Research Articles

Dynamic Transition of Exchange Rate Regime in China

AbstractThe paper considers the optimal transition path for China's exchange rate regime. How can China successfully make the shift from the current dollar peg regime to a more desirable regime, whether a basket peg or a floating regime? To answer this question, we develop a dynamic small open economy general equilibrium model. We construct four transition policies based on a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the dollar peg regime. Two main results are derived from the quantitative analysis using Chinese data from 1999Q1 to 2010Q4. First, following a gradual adjustment to a basket peg regime is the most appropriate path for China to take, with minimal welfare losses associated with the shift in the exchange rate regime. Second, a sudden shift to the basket peg is the second best solution, and is superior to a sudden shift to floating because the monetary authority can efficiently determine optimal weights to attach to currencies in the basket to achieve policy goals once they adopt a basket peg regime.

Exchange Rate Versus Tariff Policies in Brazil: Results from MIBRA-USP, an Interregional Applied General Equilibrium Model of the Brazilian Economy

Since the beginning of the 1990’s Brazil has been experienced an opening process in the economy, which in turn has caused structural changes in the productive structure. In this work it is made an evaluation of the different impacts caused by changes in the exchange rate and in the tariffs over the Brazilian economy and its 5 macro regions. The study is done through the use of an interregional applied general equilibrium model, the MIBRA-USP. The results show that either a devaluation of the exchange rate or an increase in tariffs can cause a rise in the employment level as well as in the economic activity. However, there are differences between the policies, among which it is called attention for the real consumption of the families that decreases with the exchange rate devaluation and increases with higher tariffs.

The intertemporal general equilibrium model of the economy with the product, money and stock markets

This paper presents the general economic equilibrium model of the Republic of Kazakhstan. The model includes eight macroagents. Four of the macroagents, Household, Producer, Bank, Owner, are described by optimisation problems. The other four macroagents follow prescribed scenarios. All agents contact through market interactions. This framework appears to be an appropriate method to include the stock, money and product markets in a single macroeconomic model. The version of the model calibrated on quarterly data of 2005–2010 simulates the trajectories of variables that characterise the state of the real and financial sectors. The results presented in this paper demonstrate the ability of the model to represent the main effects and trends in the economy of the Republic of Kazakhstan.

Monetary policy in a dual currency environment

We develop a small open economy general equilibrium model with sticky prices and partial dollarization – a situation where both domestic and foreign currencies coexist. We derive a tractable representation of the model in terms of domestic inflation and the output gap in which a trade-off, which depends on the degree of dollarization, arises endogenously due to the presence of foreign interest rate shocks. We use this framework to show analytically how higher degrees of dollarization induce larger volatilities of the output gap and inflation, thus hampering a central bank’s effectiveness to stabilize the economy. Our impulse response functions show that the transmission of such shocks has a positive (negative) effect on inflation and negative (positive) effect on the output gap when money aggregates and consumption are complements (substitutes).

Fiscal Devaluations in EMU

2013SummaryWe use a small open economy general equilibrium model to analyse the effects of a fiscal devalua-tion in an EMU country. The model has been calibrated for the Spanish economy, which is a goodexample of the advantages of a change in the tax mix given that its tax system shows a positive biasin the ratio of social security contributions over consumption taxes. The preliminary empirical evi-dence for European countries shows that this bias was negatively correlated with the current accountbalance in the expansionary years leading up to the 2009 crisis, a period when many EMU membersaccumulated large external imbalances. Our simulation results point to significant positive effects ofa fiscal devaluation on GDP and employment similar to the ones that could be obtained with an ex-change rate devaluation. However, although the effects in terms of GDP and employment are simi-lar, the composition effects of fiscal and nominal devaluations are not alike. In both cases, there isan improvement in net exports, but the effects on domestic and external demand are quite different

International Monetary Transmission with Bank Heterogeneity and Default Risk

This paper compares the effectiveness, efficiency and robustness of standard and non-standard monetary policy tools, such as the banks’ refinancing interest rate, penalty interest rate on deposit facility holdings and minimum reserve requirements on attracted deposits. The assessment is performed on the basis of a numerically evaluated open economy general equilibrium model for macro-prudential analysis where optimal decisions by internationally linked banks are key determinants of international financial flows and wider economic outcomes. Banks differ in terms of balance sheet endowments and risk preferences and take decisions rationally and competitively. Default risk, borrowing and lending are endogenous results of individual decisions of private agents (banks and households), as well as systemic outcomes of market interaction.

International monetary transmission with bank heterogeneity and default risk

This paper compares the effectiveness, efficiency and robustness of standard and non-standard monetary policy tools, such as the banks’ refinancing interest rate, penalty interest rate on deposit facility holdings and minimum reserve requirements on attracted deposits. The assessment is performed on the basis of a numerically evaluated open economy general equilibrium model for macro-prudential analysis where optimal decisions by internationally linked banks are key determinants of international financial flows and wider economic outcomes. Banks differ in terms of balance sheet endowments and risk preferences and take decisions rationally and competitively. Default risk, borrowing and lending are endogenous results of individual decisions of private agents (banks and households), as well as systemic outcomes of market interaction.

Environmentally Sustainable National Income: Indispensable Information for Attaining Environmental Sustainability

Environmental functions are defined as the possible uses of the non-human-made physical surroundings on which humanity is entirely dependent. Competing functions are by definition economic goods, indeed the most fundamental humanity disposes of. Environmental sustainability is defined as the dynamic equilibrium by which vital environmental functions remain available for future generations. Environmentally sustainable national income (eSNI) is defined as the maximum attainable production level by which vital environmental functions remain available for future generations. Thus the eSNI provides information about the distance between the current and a sustainable situation. In combination with the standard national income (NI), the eSNI indicates whether the part of the production that is not based on sustainable use of the environment is increasing or decreasing in the course of time. Calculation of the eSNI involves the use of environmental models and a static general economic equilibrium model. It is shown that asymmetric entries are obscuring what is happening with both environment and production and that there is no conflict between employment and safeguarding the environment.

Biofuels, cropland expansion, and the extensive margin

BackgroundRecently, several papers have assessed land use consequences of biofuel expansion. In the absence of empirical evidence, these papers assigned subjective values to extensive margin (productivity of new croplands over productivity of existing croplands).MethodsThis paper fills the gap in this area and provides a new data set which estimates land productivity at 0.5° × 0.5° (longitude × latitude) grid-cell level using a process-based biogeochemistry model, the terrestrial ecosystem model (TEM) calibrated for a C4 crop.ResultsThe results obtained from the TEM can be used in connection with economic models which are designed to assess land use changes induced by economic factors. To show a real application, a set of regional extensive margins are calculated based on the new data set. The calculated regional extensive margins are then introduced in a computable general equilibrium (CGE) economic model which has been frequently used to assess the land use implications of ethanol production. Finally, land use changes due to US ethanol production are examined using the augmented CGE model with the new extensive margins.ConclusionsThe approach developed here provides estimates of extensive margins disaggregated by the country and agroecological zone, replacing the earlier assumption of a globally uniform value. Using these new parameter values, the estimation of land required for ethanol production is 25% lower than earlier published results.

The Dynamics of Current Account Imbalances in Pakistan

This paper examines the dynamics of current account imbalances in Pakistan. Following the small open economy general equilibrium model of Obstfeld and Rogoff (2005), and adding few variations in model, we investigate the impact of external shocks induced changes in current account on the real exchange rate, inflation rate and outputs of tradable and non-tradable sectors in the small open economy. Using generalized method of moments (GMM) strategy, this study suggests three main findings: first, there are low elasticities of substitution between tradable and nontradable goods, and presence of home bias for the small open economy of Pakistan. Second, external shocks that change the current account position affect the relative prices of domestic nontradable have large impacts on inflation rate, real exchange rate, and on both sectors outputs, third, it changes the international relative prices and put massive pressures on real exchange rate only. Overall, external economic shocks lead to significant variations in economic activity in Pakistan.

Accounting for household heterogeneity in general equilibrium economic growth models

We describe and evaluate a new method of aggregating heterogeneous households that allows for the representation of changing demographic composition in a multi-sector economic growth model. The method is based on a utility and labor supply calibration that takes into account time variations in demographic characteristics of the population. We test the method using the Population-Environment-Technology (PET) model by comparing energy and emissions projections employing the aggregate representation of households to projections representing different household types explicitly. Results show that the difference between the two approaches in terms of total demand for energy and consumption goods is negligible for a wide range of model parameters. Our approach allows the effects of population aging, urbanization, and other forms of compositional change on energy demand and CO2 emissions to be estimated and compared in a computationally manageable manner using a representative household under assumptions and functional forms that are standard in economic growth models.

Inserting Ecological Detail into Economic Analysis: Agricultural Nutrient Loading of an Estuary Fishery

Linked general equilibrium economic and ecological models are connected through agricultural runoff and the fisheries. They are applied to a North Carolina estuary in which agricultural runoff alters phytoplankton densities and the resulting hypoxia leads to diminished fisheries. The effects of hypoxia on multiple species across space are analyzed and the joint economic and ecosystem wide response to a policy of reduced runoff is quantified. The approach provides an assessment of changes in ecological welfare (in terms of species populations) and economic welfare (in terms of equivalent variations) following reductions in runoff.

The optimal currency basket under vertical trade

This paper explores the theory of optimal currency basket in a small open economy general equilibrium model with sticky prices. In contrast to existing literature, we focus on an economy with vertical trade, where the currencies in the basket may play different roles in invoicing trade flow. In a simple two-currency basket, one currency is used to invoice imported intermediate goods and is called “import currency”, while the other currency is used to invoice exported finished goods and is called “export currency”. We find that the optimal weights of the import currency and the export currency depends critically on the structure of vertical trade. Moreover, if a country decides to choose a single-currency peg, the choice of pegging currency also depends on how other competing economies respond to external exchange rate fluctuations.

Global and local determinacy in a one-step forward looking New Keynesian model

In this paper we consider a New Keynesian model for optimal monetary policy in a staggered fashion. We provide the relations of a non linear model of general economic equilibrium, implementing a suitable Taylor-type interest rate rule. We characterize the conditions that guarantee local determinacy and explore conditions under which local bifurcations of the target equilibrium may occur. Afterwards, we argue how local determinacy might be associated with global indeterminacy, providing some numerical examples.

A Control Theorist's Perspective on Dynamic Competitive Equilibria in Electricity Markets

AbstractWe are moving towards a radical transformation of our energy systems. The success of the new paradigm created by the Smart Grid vision will require not only the creation and integration of new technologies into the grid, but also the redesign of the market structures coupled with it. In order to design the market structures for the grid of the future, economic models able to capture the new physical reality are the first requirement. In this paper, we present a general economic equilibrium model. The model is constructed using well-known control theory techniques, allowing a natural inclusion of dynamics, uncertainty in supply and demand, and other elements usually not considered in standard economic models.

An open economy general equilibrium model with heterogeneous producers, a homothetic utility function and endogenous elasticity

Recent monopolistic competition models have identified three main sources of the gains from trade: (1) the introduction of new varieties for consumers, (2) an improvement in efficiency through the exit of low-productivity firms, and (3) a reduction in firms’ markups through import competition. In this paper, we extend Feenstra (Economics Letters, 78(1):79–86, 2003) to develop a model with producers heterogeneous in productivity to capture these gains. Here, firm markups are decreasing with market share, and trade introduces new varieties to consumers and reduces the market share of domestic firms. This reduces markups and profits and forces low-productivity firms to exit. This pro-competitive effect on the distribution of productivity contrasts with the conventional export-driven mechanism in a constant elasticity setup. We can usefully extend this model for further study because of the homotheticity of the utility function and the tractability of the model.

Monetary policy and trade imbalance adjustment

The paper sets up a small open economy general equilibrium model to study the dynamics of the adjustment of trade imbalances under different policies based on the Chinese economy. The policies that adjust domestic prices require a long period to achieve trade balance and induce fluctuations of output and inflation, regardless of whether capital markets are open or closed, while policies that adjust the exchange rate quickly result in diminished trade surpluses, and do not cause fluctuations of output and inflation. However, policies that adjust the exchange rate slowly also lead to fluctuations under a capital flow setting. Nominal frictions are important factors to these differences, because they slow down the price adjustment, but do not bother the exchange rate changes. From the perspective of welfare, fast exchange rate adjustment policies are better than price policies, and adjustment under capital flow is better than adjustment under capital control. The implications for China's trade surplus are analyzed.

Twin dollarization and exchange rate policy

This paper develops a small open economy general equilibrium model with nominal rigidities to study twin dollarization in East Asian economies, a phenomenon where firms borrow in US dollars and also set export prices in US dollars. In this model, we endogenize both the currency of liability denomination and the currency of export pricing. We show that a key factor that affects firms' dollarization decisions is exchange rate policy. Twin dollarization is an optimal strategy for all firms when exchange rate flexibility is limited, which implies that a fixed exchange rate regime may lead to an equilibrium with twin dollarization. Furthermore, we find that twin dollarization can reduce the welfare loss caused by the fixed exchange rate regime, as it helps to cushion the economy against domestic nominal risk.

Greenhouse gas mitigation in a carbon constrained world–the role of CCS in Germany

Abstract In a carbon constrained world, at least four classes of greenhouse gas mitigation options are ava ilable: energy efficiency, switching to low or carbon-free energy sources, introduction of carbon dioxide capture and storage along with electric generating technologies, and reductions in emissions of non -CO 2 greenhouse gases. The contribution of each option to overall greenhouse gas mitigation varies by cost, scale, and timing. In particular, carbon dioxide capture and storage (CCS) promises to allow for low-emissions fossil -fuel based power generation. This is pa rticularly relevant for Germany, where electricity generation is largely coal -based and, at the same time, ambitious climate targets are in place. Our objective is to provide a balanced analysis of the various classes of greenhouse gas mitigation options with a particular focus on CCS for Germany. We simulate the potential role of advanced fossil fuel based electricity generating technologies with CCS (IGCC, NGCC) as well the potential for retrofit with CCS for existing and currently built fossil plants from the present through 2050. We employ a computable general equilibrium (CGE) economic model as a core model and integrating tool.

The Optimal Currency Basket with Input Currency and Output Currency

This paper explores the determination of the optimal currency basket in a small open economy general equilibrium model with sticky prices. In contrast to traditional literature, we focus on an economy with vertical trade, where one currency is used as the invoicing currency of imported intermediate goods and is called the \input currency, while the other currency is used for the invoicing of exported flnished goods and is called the \output We flnd that in the optimal currency basket the weight between the input currency and the output currency depends critically on the structure of vertical trade. Moreover, we show that if a country decides to choose a single-currency peg, then the choice of pegging currency depends mainly on how other economies respond to external exchange rate ∞uctuations. In a sense, our paper provides a case for the Chinese RMB peg in some East Asian economies, given the importance of the RMB as an input currency.